Emergency Fund

Have you ever actually had an emergency?

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What’s the most expensive emergency you’ve ever had?

Good question right? If you’re like me you’re lucky enough to have never really had an emergency. I mean, sure I’ve had to replace my car tires before. Or buy a last minute plane ticket for a family issue. But these things are relatively insignificant in terms of dollars required. Maybe $1,000 tops? Hardly requiring us to have $10,000 on hand.

I think it’s safe to say, in the seven years I’ve now had an emergency fund, I’ve used it exactly ZERO times.

I’m trying to wrap my brain around a situation in which I would have an unexpected and legitimate need for $10,000 cash.

The only thing I can really think of that would require immediate need for a large amount of cash would be a house related issue. Maybe my roof completely caves in? Or my furnace catches on fire and destroys my basement?

Is this the reason I keep $10,000 on me at all times?

Seems a little paranoid, don’t ya think?

Aren’t a lot of these concerns the very reason I pay for homeowners insurance?

I can’t help but wonder how many of you have, at one point, needed access to a significant amount of cash?

How much, and why did you need it?

Today you entertain me, with your emergency fund related stories 😉

If you have more than $10,000 in the bank, I think you’re silly.

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After a few years of living well below our means, Girl Ninja and I have managed to save up about $80,000. On average, we spend about $3,500/month. According to my calculator watch, this means we could survive for about two years – at current spending rates – on just our savings. If we cut back on spending just a tad, which we would in the event we both lost our jobs, we could stretch this out to over 2.5 years of expenses. Talk about financial security!

But then there is this pesky thing called a down payment that one must consider when looking to buy a home (don’t worry this isn’t another post about homeownership). For the houses we are looking at, this likely means a down payment of around $70,000. This leaves us with just $10,000 in the bank after we buy a house (note: I’m assuming the seller will pay most, if not all, of our closing costs as part of the purchase agreement).

In the event we both lost our jobs, $10,000 would only sustain us for about three months. That’s a heck of a lot less cushion than the 18+ months we’ve gotten use to having. So what are we gonna do about it?

Absolutely nothing!

First, let’s not forget the $80,000 we have banked is not really our emergency fund. Some of it is, but most of it has always been earmarked as a “future house fund”.

While you might say “Ninja three months of expenses is not enough for an e-fund”, I would say back “You sir are a cotton headed ninny muggins.” $10,000 is plenty for the Ninja household. Here’s why…

The odds of us losing our jobs at the exact same time are quite small. She’s a teacher and hasn’t had an issue substituting or getting a contract position since she graduated college. Even when the San Diego School District was slashing positions left and right, Girl Ninja got a full-time contracted teaching position. Heck, she secured a teaching contract in Washington state three months before she even moved here. Needless to say, the girl is good at what she does.

While it’s possible the federal government workforce could be reduced here in the coming months/years, my position isn’t going anywhere. This isn’t an arrogant statement, it’s just reality. You remember when there were murmurs of a government shutdown a year ago? I got an email from my agency specifically saying our position is considered “mission critical” and I would have to continue working, shutdown or otherwise. What’s more, my performance reviews have always been favorable and I am no longer the youngest agent on the team (well I am the youngest by age, but not by years worked). Government positions are infamous for being pretty darn stable. If we worked in less secure fields we’d definitely consider bumping up our E-fund.

Maybe $10,000 isn’t enough, but I just can’t think of a plausible situation in which we would need access to all of that money in one swoop. Both of our vehicles are fully insured (comprehensive and collision) so they could be stolen, or totaled by an uninsured motorist, and we’re protected. We have renters insurance so if someone breaks in to our house and steals all our stuff, we’re covered. We have awesome healthcare benefits through our employers (Girl Ninja is actually double-covered) and our max out-of-pocket is well below this $10,000 threshold. Life and disability insurance are benefits my work provides. Short of someone kidnapping Mom Ninja and demanding $50,000 ransom, our $10,000 emergency fund should cover all major hiccups (especially if one, or both, of us are still working and brining in money).

Let’s not forget, savings accounts are terrible places to let money sit. They don’t keep up with the rate of inflation, which means you actually LOSE money each year. Why put more in a crappy savings vehicle than necessary? Remember money in a Roth IRA, and/or a taxable investment account, can be accessed in the event of an emergency without penalty.

Heck, if Girl Ninja and I decided tomorrow that we never wanted to buy a home, we would immediately invest the $70,000 we would have put down on a house. WE WOULD NOT KEEP IT IN OUR SAVINGS ACCOUNT ANY LONGER. We only have $80,000 in the bank because we plan on writing a fat check in the next few months.

Stocks and bonds help grow wealth. Savings accounts can’t even maintain wealth 🙁

Sometimes, I think people who have a 12 month emergency fund are silly, but I guess that’s the beautiful thing about personal finance. You do you, and I’ll do me. Chances are we’ll both end up just fine… although my money will at least be keeping up with inflation 😉

Low blow?

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How much do you have in an emergency fund right now (dollars and/or months of expenses covered)? What’s your ultimate E-fund goal? What made you decide that amount (why not more than that)? Has anyone with a 12 month e-fund actually used ALL of that money for an emergency?

p.s. I am not advocating people should keep three months of expenses in the bank and blow the rest, but merely they should consider keeping three months in cash, and investing the rest.

Double Standard

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I have two investment vehicles established for retirement, My Roth IRA and my 401K. I don’t play favorites with these two accounts and if it was within my control, I would contribute to them equally (unfortunately the federal government puts a cap on Roth contributions). If you follow my net worth updates at all, you’ll notice both accounts perform pretty similarly. When my Roth goes up, so does my 401K. When my Roth goes down, my 401K follows suit (although to a lesser degree since the employer match helps mitigate my losses).

Don’t tell Girl Ninja, but I am madly, deeply, and passionately in love with my retirement accounts. If all goes according to plan, they will literally make me a millionaire. Ah yes, one day I’ll be sipping a non-alcoholic strawberry daiquiri on the beaches of the Washington coast with my beautiful wife (can’t travel too far otherwise we won’t stay millionaires very long).

Am I the only person kind of excited about being super old?

Even though I have equal affection for my two retirement accounts, if the you-know-what hits the fan, I’d definitely treat them differently. That my friends is called a double standard.

Girl Ninja and I have saved up some pretty serious cash over the last year and a half, so barring some major medical catastrophe, we shouldn’t have a need to dip in to our emergency fund. One day, however, we will have bought a home and Girl Ninja will likely be a full-time mom. In a few years, we probably won’t have the cash reserves we have now.

So what happens if an emergency comes along that exceeds what we have set aside (currently $10,000) for rainy days? I’ll tell you what. I’d raid my Roth IRA like a college student raids his parent’s fridge.

I like to think of my Roth as a quasi-savings account. You put money in to it (with after tax dollars) and can take those contributions out at any time without penalty. That perk alone makes it the freakin’ Swiss Army knife of the financial sector. It combines a savings account, retirement account, and emergency fund in to one sexy product. Tell me that doesn’t get you all hot-and-bothered?!!? If I pulled my from my 401K, however, we’d be faced with tax obligations AND a ten percent early withdrawal penalty. Definitely not sexy.

Have you ever thought about treating a Roth IRA like a quasi-savings account? If needed, would you pull from a Roth or 401k first? Anyone else want to make sweet, sweet financial love to their Roth IRA?

p.s. don’t pull from your retirement accounts for things like new cars, kitchen renovations, or buying a house. The point of saving for retirement is saving for retirement, not buying shiny things that give you artificial happiness.

Emergency fund on crack.

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From age 0 to 21, my parents were my emergency plan. I had no job, no income, and no assets. I was dependent. Upon graduation, I got my current job and started putting money in the bank. While it took a few years to completely cut the proverbial umbilical cord from my parents, I am now completely mostly self-sufficient. This means I’m now responsible for all emergency planning.

Girl Ninja and I have $10,000 sitting in a savings account specifically marked for emergencies. If the car breaks down, we tap this fund to fix it. If someone is in the hospital, we have the ability to buy a plane ticket to visit. Our emergency fund provides peace of mind.

But what if Girl Ninja and I were faced with a $20,000 emergency? Or a $50,000 emergency? Or a $200,000 emergency? What would we do then? I’d never thought about it before, so I figured I’d make a list as to exactly how Girl Ninja and I would handle expensive emergencies. Hopefully it makes sense…

$0 – $10,000: Use up all of our emergency fund.

$10,000 – $50,000: Above, plus use up all our liquid cash.

$50,000 – $55,000: All of the above, plus a loan from a bank (guesstimating we would qualify for a $5k unsecured loan).

$55,000 – $65,000: All of the above, plus selling one of our vehicles (we like having two cars, but we could definitely survive with just one).

$65,000 – $85,000: All of the above, plus ask family for help. Depending on the type/urgency of the emergency, I’m guessing we could get up to $20,000 from relatives (likely more if it was life/death issues).

$85,000 – $105,000: All of the above, plus liquidating my Roth IRA.

$105,000 – $120,000: All of the above, plus use of credit cards up to $15K.

$120,000 – $140,000: All of the above plus taking out a 401K loan (keeping in mind it might end up a withdrawal if I can’t pay it back due to whatever said emergency was).

$140,000 or more: Beg people (even you readers) for money, sell my blog, all of our possessions, and anything else that has monetary value that we don’t need.

And that’s as far as I could get. Don’t know what I’d do if we were faced with a $200,000 imminent emergency. Where does one get cash when all resources have been exhausted?

Never really thought about an emergency exceeding our $10,000 e-fund account, but that could obviously happen so it’s worth thinking about. We like to pretend life is going to go according to plan, but unfortunately that’s not always the case. I live by the mantra you should hope for the best and plan for the worst. Can’t go wrong there, right?

My list is probably way different than yours. Maybe you would use credit cards before tapping your parents? Maybe you wouldn’t ask your parents at all?

If you don’t want to be lame, you should probably share in the comments below how exactly you would handle an emergency. Try and list amounts and ways you’d get the money like I did above so things stay simple. If you want, you can comment anonymously and provide a fake email address so you don’t have to worry about your personal information being out there.

So reader, how much of an emergency could you handle, and how exactly would you handle it?

How long can you survive?

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Beany Babies

I’ve had $10,000 sitting in an emergency fund for about two years now. Thankfully I haven’t needed to use it yet (and hopefully wont need to for a very long time). Even though my income and marital status has changed over the last couple years, I haven’t thought twice about changing my E-fund balance.

I initially decided on $10,000 for two reasons. First, it was a nice clean whole number, and if you read my post last week, you know I like pretty numbers. But most importantly, I picked $10,000 because it represented about 6 months of living expenses for me at the time. My rent was dirt cheap ($580/month) and I was pretty frugal. My expenses were way less than 1,667 a month ($10,000 divided by 6 months).

Last August I got married. As I went from “single” to “married” every aspect of my budget increased (food, rent, gas, etc). Fortunately, Girl Ninja was makes decent money as a teacher, so even though our expenses increased, the net result was positive.

If you look at our 2011 Ninja Budget Of Epic Gloriness, you’ll see we have budgeted for about $3,900 of expenses each month. That would mean our $10,000 E-fund is really only able to cover about 2.5 months of living expenses. Nowhere near the six month reserves I recommend…or is it? dun dun duuuuuun (insert dramatic music here!!!!)

At first glance you’d think we have less than three months expenses in our E-fund, but a closer look shows that $10,000 could easily last us 6 months, and probably closer to a year! But Ninja, how do you do it? Well reader, I’m glad you asked.

The $3,900 outflow shown in our budget accounts for everything. Retirement contributions, tithing, dining out, and the like. If Girl Ninja and I both lost our jobs tomorrow (which is pretty unlikely), we could easily cut our monthly budget to almost half. Here’s how….

Roth IRA: $416 to $0 (stop retirement contributions)
401K: $305 to $0 (see above)
Tithe: $800 to $0 (no income to tithe on)
Food: $500 to $350 (no more dining out)
Gas $200 to $150 (stop using my car)
Random Things: $377 to $200 (cut entertainment, clothing, etc)

By making these cuts, our $3,900/month budget slims down to a much more manageable $2,011/mo. Which means our $10,000 E-fund can last us 5 months in the event we both lost our jobs.

But wait, there’s more!!! (I feel like a cheesy infomercial…haha)

If only Girl Ninja lost her job, we wouldn’t need our E-fund since I make enough to support our current lifestyle. If I lost my job and we decided to keep spending at current levels, we could last 10 months off Girl Ninja’s income and our E-fund. But if I lost my job and we made most of the cuts mentioned above, we’d actually be able to survive off just her income…forever. for. EV. ER. (sandlot anyone?)

So even though it may appear as though I’ve neglected our emergency fund over the years, I really haven’t. Ten thousand is completely sufficient considering the stability of our careers and the flexibility we have within our budget.

For those of you that have an emergency fund (hopefully all of you), how did you determine how much to put in it? Did you pick a pretty number like $5k or $15K? Did you set the amount based off your current monthly expenses multiplied by a specific time frame, like 6 months? Anyone treated their E-fund similar to the ninja household?

Am I a puppy murderer?

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Girl Ninja and I don’t own any pets. Mom and Dad Ninja, however, have always been dog lovers. In fact, at one point we had 12 greyhounds in our house (we fostered them until they could find a good home). They’ve scaled things back, however, and now only have three dogs, a boxer and two pugs. Allow me to introduce them…

While I’ve always known my parents loved their three dogs more than their three children, I never really realized just how deep that love ran. That is, until Bella (the boxer) started having knee problems (apparently her knee had completely blown out). She could no longer prance around my parents yard chasing the two smaller (and stupider) pugs. Concerned for their beloved Bella, my parents took her to the vet.

After a few consultations with two different veterinarians, Mom and Dad Ninja realized they really only had three options (listed cheapest to most expensive): put her down, amputate the bad leg, perform a knee replacement surgery.

Can ya guess which option my parents went with? You’re right, if you guessed knee replacement surgery. I don’t remember the total cost for the procedure, but it was upwards of $2,000. TWO THOUSAND DOLLARS!

Now I ain’t no puppy murder, but there is no freakin’ way I’m dropping that kind of coin on a pet. That’s like buying 4 iPads, or two 50″ LED TVs, or 4,000 Jack in the Box tacos.

It’s easy for me to think my parents are insane for opting for the surgery over amputation or putting her down, seeing that I… A) have no where near as much liquidity as they do and B) Bellas not my dog. I know my parents made the right choice for them, but I think my “vet” threshold would be about $500. Anything over that and the dog is going to doggy heaven, if there is such a place.

What the largest vet bill you’d be willing to pay ($500, $1,000, $10,000)? At what point does the well being of your pet go from a moral obligation (feeding, general health, etc) to an excessive financial burden? Anyone out there have tales of uber crazy animal fanatics that have dropped a small fortune on their pet?

Have you used your emergency fund?

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Beany Babies

As I began the my PF journey a few years ago, I did what just about every financial adviser recommends; I set up my emergency fund. Some suggest saving $1,000 then focus on paying off debt, while others recommend saving up more like three or six months of expenses. Don’t ask me why, but I decided $10,000 sounded like a good goal. So, like a train car, I kept on chugging, and eventually realized that goal.

I have had this $10k just chilling in my online savings account for 1.5 years now. Fortunately, I’ve never had an emergency. But don’t get me wrong, I’m not stupid enough to think I’m immune to emergencies.

Difficult times are sure to come. I could lose my job, my car could spontaneously combust, Girl Ninja could immaculately conceive 19 babies, etc. I think Emergencies can be pretty well defined via this highly complex mathematical formula I’ve worked up…(you can thank me later)…..

Humans + Life = Emergencies/Bacon

Maybe the formula doesn’t make as much sense as I was hoping, but the point is….something will go down, at some point in the future, that will require me to use some portion of my emergency fund. Is this fact vague? Absolutely! But it’s definitely important to remember stuff happens. And when it does, I’ll be oh-so-glad I have that E-fund… that is, assuming the emergency doesn’t cost $10,001 or more.

Like I said earlier, I’ve had my E-fund set up for 18 months and have been fortunate enough to not need it. I know this isn’t the case for everyone though, so I’d like to see what your E-fund situation is looking like. Take a second to respond to the questions below 🙂

How much do you have in it?

When did you first establish it?

How many times have you accessed it for emergencies?

Have you ever cheated and used it for a non-emergency?